02005cam a22002417 4500001000600000003000500006005001700011008004100028100002200069245010300091260006600194490004100260500001900301520105900320530006101379538007201440538003601512700002401548710004201572830007601614856003701690856003601727w2151NBER20150303181058.0150303s1987 mau||||fs|||| 000 0 eng d1 aCampbell, John Y.14aThe Dollar and Real Interest Ratesh[electronic resource] /cJohn Y. Campbell, Richard H. Clarida. aCambridge, Mass.bNational Bureau of Economic Researchc1987.1 aNBER working paper seriesvno. w2151 aFebruary 1987.3 aIn this paper, we investigate the link between the real foreign exchange value of the dollar and real interest rates since 1979. We argue that it is important to consider the possibility that real exchange rate movements reflect movements of the long-run equilibrium exchange rate as well as real interest differentials. We use a state-space approach to estimate the importance of shifts in the long-run equilibrium exchange rate, the persistence of the ex ante short-term real interest differential, and the effect of this differential on the exchange rate. Using U.S., Canadian, British, German and Japanese data from October 1979 to March 1986, we find that movements in the dollar real exchange rate have been dominated by unanticipated shifts in the expected long-run real exchange rate. Ex ante real interest differentials have not been persistent or variable enough to account for a major part of exchange rate variation. We use Mussa's (1984) rational expectations model of the real exchange rate and the current account to interpret our results. aHardcopy version available to institutional subscribers. aSystem requirements: Adobe [Acrobat] Reader required for PDF files. aMode of access: World Wide Web.1 aClarida, Richard H.2 aNational Bureau of Economic Research. 0aWorking Paper Series (National Bureau of Economic Research)vno. w2151.4 uhttp://www.nber.org/papers/w215141uhttp://dx.doi.org/10.3386/w2151